Recent Articles

Commercial Linux distributor Red Hat hosted its annual analyst day in New York today, and as Wall Street continues to hemorrhage, the company couldn't have picked a gloomier time for the occasion.

But harsh economic conditions tend to accelerate technology shifts, so the top brass at Red Hat were a pretty chipper bunch as they explained to Wall Street how they intend to make money in the coming years. Those in attendance were probably just grateful to have something else to listen to and talk about, and more than a few were probably reminiscing about the killing they made when Red Hat went public so gloriously little more than nine years ago.

But as a company that is trying to create an integrated software stack that aims to replace legacy operating systems as well as Unix and Windows, RedHat figures that if the economy really heads south - and it sure do look that way, don't it? - then Red Hat stands to be the beneficiary. The last couple of times the economy got choppy, this certainly happened with minicomputers, Unix servers, client/server computing, and the move to x86 and x64 servers and Windows and Linux.

That's the word from Jim Whitehurst, who was tapped to be Red Hat's president and chief executive officer in January after Matthew Szulik had to step down from those positions because of family health issues (really). Whitehurst was formerly chief operating officer at Delta Airlines and one of the key people behind its Orbitz online reservation service.

Speaking to analysts, he explained that enterprise software comprised a $200 billion market worldwide and that the core infrastructure software where Red Hat sells products represents about a $50bn opportunity, with operating systems accounting for about $21bn of that.

Of the core infrastructure software area, Whitehurst quipped, "it's a big market, but if we owned it, it would be a much smaller market."

To prove his point, Whitehurst said that Red Hat had a "high teens" share of server operating system installs, but that it only has a few points of revenue share. Clearly, other operating systems and related software stacks cost more dough. But the funny bit is that Red Hat can still make decent money - as measured by profits as a per cent of revenue, not in absolute dollars - doing what it does by licensing support contracts for integrated open source software.

But like other players, if Red Hat hopes to grow, it has to expand beyond the big companies who consume technology easily - to move from Wall Street to Main Street, as the politicians in America keep saying. "Red Hat does well with companies that use technology for competitive advantage," explained Whitehurst. "We have very high share here. For instance, Red Hat is as pervasive as water at the New York Stock Exchange," which has tapped RHEL as its platform of choice for all future application development and deployment.

But small and medium businesses - the very companies that bought small mainframes and then proprietary minicomputers, then embraced the Unix wave, and now who are looking to Windows and maybe Linux as their platform - have to perceive of Red Hat as an alternative to the complete Windows stack that Microsoft has put together. "Among the vast majority on Main Street, we barely have share here," says Whitehurst.

One of the other targets that Red Hat has to focus on to grow is the large base of customers who have deployed the Fedora development Linux in production, freebie RHEL licenses, or their CentOS clones - and are not paying for support.

"There is a lot of unpaid Linux out there; there is a lot of unpaid RHEL," says Whitehurst. Based on an analysis by various and unnamed consultancies, Whitehurst said that there is over $1 billion in revenue opportunity per year among these unpaid Red Hat Linux customers. "We have some customers who have bought one copy and then call us over 100 times a year. These are the nickels lying all over the floor." In addition, there are companies who buy servers with Linux pre-configured on them who don't even know they have to renew.

To that end, Red Hat is trying to shift 1 to 2 points of share in the operating system space per year toward itself, which it says it can accomplish by switching customers from unpaid to paid support, by growing its piece of the action among existing customers (adding footprints and support licenses), and taking share away from other Linux providers and other platforms such as Windows and Unix. "There's still a lot of Unix out there on aging machines," according to Whitehurst.

To which Hewlett-Packard and Sun Microsystems - and IBM with its mainframes and System i midrange - breathe a sigh of relief.

The other part of Red Hat's growth is from all of the software that rides on top of RHEL, including JBoss middleware, HPC and real-time extensions, SOA development environments, clustering, desktop virtualization, and other software that is part of the RHEL stack. Middleware is growing faster than the core RHEL business, and Whitehurst says that "it feels like the good old days of Unix-to-Linux migration" during the last recession. And in fact, Red Hat expects that by 2012, the non-OS extensions to the RHEL stack will account for about 20 per cent of the company's revenue. ®